Cash savings give you a financial cushion and can help you reach your financial goals. However, it's important to manage your money wisely so you can get the most of it. Here are six tips to help you on your way.
How to manage money better
1. Work out how much to put aside as an easy-access emergency fund
You don’t want to have to sell investments, or, even worse, have to borrow money, in the event of an emergency such as an urgent car or home repair. That’s when having an emergency fund to cover life’s unexpected twists and turns really counts.
How much to keep as an emergency fund is going to depend on circumstances such as how secure your employment or self-employment is, your ongoing expenses and the various things that could realistically happen unexpectedly. As a rule of thumb, you also should keep enough to pay your essential expenses for three to six months in case of unemployment or ill health. You should be able to cover costs like energy, mortgage or rent, travel and food costs. That way should the unexpected happen, you’ll be ready.
2. Choose the right type of savings account for your goals
Once you have an emergency fund set aside, setting up a longer-term savings account can be a good goal to focus on next, as this could allow you to earn additional interest on your money saved. Getting the most out of your savings account starts with considering your financial goals and how soon you might need to access your savings. When choosing your savings account, you have a few options, including easy access, notice or fixed term.
Although fixed term accounts usually pay the highest interest rates, they usually don’t allow you access to your money under any circumstances before the agreed term is up. So you need to be sure you can tie your money up for the specified period. A fixed term account may be appropriate for planned spending in one or two years’ time, say, such as school fees, or the purchase of a new car. However, it won’t be right for an emergency fund or shorter-term spending. If you don’t know when you’ll need the money you should stick to an account that can be readily accessed.
3. Allocate pots for different goals
Having multiple accounts can help you manage your money to help you achieve these different financial goals with varying timelines. This can help you to keep your money organised and separate for different purposes. For example, you could have an instant access account for your emergency fund, a separate one for your holiday savings and a fixed one attracting a higher rate for your house deposit if your planned purchase is further into the future.
Earmarking different pots with clear goals can also help you stay motivated to stick to your savings plan and resist the temptation to spend the money on something else. With Charles Stanley Direct Cash Savings it’s easy to mix and match a range of instant access, notice and fixed term products that can be used for different goals with a single account identification and sign in process. For many a combination is likely to be a good strategy, depending on how much you value flexibility and access versus maximising return.
4. Maximise your interest
For much of the past 15 years shopping around for the best interest rates on savings hasn’t mattered that greatly. With interest rates at rock bottom there wasn’t much to be gained by shifting your money around. That’s now completely changed. Average savings rates are at their highest level in 15 years, making it more important than ever for savers to be active with their cash. No matter the amount you have, you’ll want to make sure every penny of your savings is attracting the best interest rate possible because the best rates available out there are much, much higher than the worst!
Typically, the traditional, high street banks have failed to pass on recent interest rate rises to investors so there’s now billions of pounds languishing in accounts paying paltry rates compared with what’s on offer elsewhere. According to our research*, 45% of savers are currently receiving interest of 3% or less, with one in four less than 2%. This is significantly lower than the most competitive rates available. Other banks offer attractive rates only to cut them, sending savers back to square one. Similarly, when fixed rate deals come to an end, they typically roll over into a far less rewarding easy access account if you do nothing, so it’s important to keep on top of when your fixed rate expires and have a target for your cash lined up.
There’s plenty of easy opportunities to make your savings work harder with an online savings marketplace such as Charles Stanley Direct Cash Savings. There’s a broad range of competitive savings accounts you can switch between easily – so you’re not left behind when a deal expires or rates change, allowing you to maximise the interest you receive.
When considering easy access accounts the aim should be to get the best rate available and if something trumps it you can always switch again later on. For fixed rates there can be times when it pays to wait a little, for instance when Bank of England interest rates are set to go higher. However, at the present time there probably isn’t much to be gained by waiting. Any further move will likely be small, and markets are now starting to look at when rates might start being cut, probably sometime in the second half of next year.
5. Protect your savings
If you have larger amounts in cash you need to be aware of the protection you have for your savings in case the bank or building society you use fails. The Financial Services Compensation Scheme (FSCS) guarantees the first £85,000 you have saved, or £170,000 for a couple, per UK-regulated financial institution. Importantly, this is not per account. If you had two accounts with the same bank, your money would only be safe up to the first £85,000 per person.
To guarantee your money's safety beyond these thresholds, you'd need to spread it across multiple institutions. However, beware that some banks operating a separate name or brand share a banking licence with another and therefore share a FSCS registration. For example, Halifax and Bank of Scotland are both owned by Lloyds Banking Group and share a licence, so you are only covered up to £85,000 across the pair. In contrast, RBS and NatWest are both owned by the NatWest Group, but each bank has its own banking licence, so their limits are separate. An online savings platform makes it straightforward to keep within the thresholds and spread your money around while still maximising the interest rates you receive.
6. Remember investments are usually better for the long term
While cash is an important part of your financial plans it shouldn’t dominate them. That’s because in the longer term too much in cash doesn’t provide enough return to consistently beat inflation, especially after tax. If you have some money you don’t need to touch for at least five years, and are wondering how best to beat inflation during that time, think about investing it as it’s the far more effective way to grow wealth.
You should only invest your money if you can afford to wait out any fall in its value, but in the longer term share markets have a much better record of outpacing inflation than cash. By housing your chosen investments in a Stocks and Shares ISA you can maximise your returns by sheltering them from tax. You don’t have to be a financial expert to invest as there are simple, packaged investments known as ‘funds’ that can match your objectives and how much risk you want to take with your money. For instance, our multi-asset funds offer four risk levels and are spread across lots of different shares and other assets to reduce risks.
* Charles Stanley commissioned research from Censuswide of 2,033 UK adults with over £5,000 in savings (Not including pensions)
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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